Weekly Reads
Weekly Reads - March 27, 2023

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With a plethora of attractive companies at low valuations the Japanese stock market could rebound if the Tokyo Stock Exchange’s recent corporate governance efforts prove to be successful in helping change the corporate mentality in Japan. 

The Tokyo Stock Exchange (“TSE”) is pushing for better corporate governance in Japanese companies hoping to attract foreign investors back into the Japanese market. The TSE has requested companies trading below book value to come up with capital improvement plans starting this spring. Previous campaigns by the TSE have had limited success but this new campaign could be much more successful. The TSE is being much more aggressive in changing corporate government this time around forcing companies trading at massive discounts to disclose their policies and initiatives to improve their ROE and fixing their underperformance. The TSE is looking to re-educate management teams on the importance of ROE, cost of equity, and capital efficiency. This push could be huge in the Japanese market where half of the stocks in the TOPIX index trade below book value compared to 3% of the S&P 500 index. We have seen some examples of improving corporate governance over the last year with Honda announcing $500 million in stock repurchases and electronics company Citizen Watch announcing a buyback of a quarter of their shares outstanding. Shares of these companies spiked after these announcements signaling to other cash rich companies in Japan that buybacks may be the optimal route to lift their share prices. The TSE’s continuing commitment to improving market returns could be the catalyst to spark foreign investor interest back to the long ignored Japanese stock market.

With Lyft’s founder stepping down and the company’s future in limbo there is ample opportunity for Uber to continue taking market share potentially killing off its only national competitor.

Lyft’s co-founder, Logan Green, has stepped down from his role as CEO after more than a decade. Green is being replaced by David Risher who has prior experience with Amazon and Microsoft and is looking at new avenues to turn around the struggling mobility company. Lyft has struggled to win market share away from larger rival Uber while burning through a ton of cash. Lyft only accounts for 26% of U.S. ride shares vs 74% for Uber despite a decade of promotions, discounts, and marketing investments in the space. The turning point for Lyft came during COVID in which ride share volumes plummeted and the company failed to pivot into other services like food delivery. Post COVID, Lyft failed to get enough drivers to support rebounding ride share volumes leading to longer wait times causing many users to move to Uber for quicker service. As of last quarter Uber surpassed its pre-pandemic bookings while Lyft forecasted dramatically lower profits despite laying off 700 employees last year. The current shakeup at Lyft indicates it is likely to continue layoffs and cutting costs to reduce cash burn with the potential of a company sale. With Uber only getting stronger it may benefit Lyft to be taken private with a team willing to invest the necessary capital to build out the platform with more services outside of ride share to better compete against Uber.

Ford’s separation of their EV and ICE business shows the uphill battle that legacy automakers face to reach their long-term financial targets.

Investors are getting the first look at Ford’s EV business with the company finally separating its legacy ICE business into its own segment. Ford has revealed that its EV business is likely to lose $3B in 2023 with the company investing in new production capacity and R&D. Ford is targeting an 8% operating margin in its EV business by 2026 with 2 million annual EV production. Management sees the legacy Ford business as a cash machine that will feed into the EV business helping the company catch up to EV leader Tesla. While Ford remains confident it can catch up to Tesla and reach its 2026 target, there remains skepticism that the legacy automaker can truly catch up. Ford remains far behind Tesla in both technology and manufacturing with Tesla. Our analysis shows that Tesla was generating mid-single digit operating margins at the 500,000 production level and generated 17% operating margins in 2022 at the 1.3 million production level. Ford’s EV business is slated to be generating margins half of Tesla’s today at a higher production level than what Tesla is doing today. This could be a competitive disadvantage for Ford with Tesla having the ability to reduce prices squeezing Ford’s margins. Ford and legacy automakers should eventually catch up with Tesla, but it could be a bumpy ride with disappointing short-term results as price competition intensifies.